Australia’s Economic Prosperity, Address to the Institute of Public Affairs, Melbourne

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Welcome

It is great to be here today at the Institute of Public Affairs.

The IPA is the world’s oldest free market think tank.

Your commitment to preserving and strengthening society’s social and economic framework has been important in Australia’s strong performance over the last 40 years.

Underpinned by a series of major economic reforms, Australia is in the midst of one of the largest economic expansions in our history.

Australia is in our 24th year of continuous economic growth – almost equaling the record 26 year achievement of the Netherlands.

Australia’s economic success has greatly enhanced our quality of life. The Government is determined to ensure this continues well into the future.

To do so we need to be able to prepare and plan for the challenges we face.

Earlier this month I released the Intergenerational Report. It sets out the difficult choices we need to make if we are to continue to improve our standard of living over the longer term.

The 21st Century economy

I am optimistic about Australia’s future and I believe that our best years are ahead of us.

So let’s imagine for a moment that optimistic future.

The Intergenerational Report shows - if we get our policy settings right - Australia’s economy will continue to strengthen over the next 40 years.

So what does this look like?

By 2055 we will be living longer and healthier lives.

More Australians will be supported in retirement through superannuation. When compulsory superannuation was introduced in 1992, life expectancy was around 72. Today, life expectancy is around 82 and in 40 years’ time life expectancy will be closer to 100. We will have better ensured our superannuation is adequate to fund our longer and healthier lives.

In 2055, more Australians will be realising the dream of owning their own home.

With the right preparation we will be living within our means, allowing us to continue to fund the social services the Australian community expects.

Regional engagement and productivity growth

By 2055 our economy will have made the necessary adjustment from the mining boom. Small businesses will be leading our engagement with Asia facilitated by numerous Free Trade Agreements.

We will have had many decades of benefit from greater and sustained engagement with the Asian region.

With over 1.5 billion people moving into the middle class in the Asian region by 2030, Australia will have reversed the tyranny of distance.

How the world is changing

By the middle of the 21st Century, the continuing growth of economies in Asia will have changed the face of the global economy.

At the same time, our lives will be very different as a result of the technological changes that have continued to alter the traditional ways of doing business.

We will be capitalising on our reputation as innovators and entrepreneurs. We will be using our education and skills to engage with our regional trading partners.

We will have businesses operating in India, we will have consultancies in China, financial advisers in Vietnam, and there will be Australian companies set up in Indonesia and right across the region.

This will be happening on a scale never seen before.

In 2055 there will be a surveyor in Melbourne working, probably from home, on a highway project in Central China.

There will be an Australian financial planner advising their clients in Mumbai on their personal investment portfolio.

Unlike now - when services represent only 20 per cent of our exports despite being 70 per cent of our economy - by the middle of the century, services could well have become our major export.

Participation and economic growth

We will achieve this by better using the skills and knowledge of all Australians.

We will be able to enter and re-enter the workforce without discrimination or impediment.

If Australia’s female participation rates could be increased to match those of other countries then we could generate significant growth in our economy.

For example, if we could match Canada’s female workforce participation rate - around four percentage points higher than Australia’s – our GDP could be a permanent $25 billion higher.

That’s like adding another region the economic size of Greater Geelong to our economy.

We will have taken a new approach to education and training and a new approach to how we manage the phases of our career when we're not going to be in the workforce.

We will look back in disbelief at an earlier time when people studied when they were young, worked through middle age and then retired.

Developing a 21st Century tax system

So how do we build a 21st Century economy? How ready are we now?

Well, a modern tax system has a key role to play.

This is why yesterday I started a conversation about how we plan a tax system for the future.

For too long our tax system has been reactive, rather than proactive.

Band-aid after band-aid has been applied to fix past problems as opposed to planning for the future. That is why our tax laws now number several thousand pages.

Our tax white paper process is helping to plan for the future and simplify the tax system.

But in order to have a rational discussion we must be in possession of the facts.

We have to learn from other countries, but also make decisions that best suit our circumstances.

Our current tax system was designed before the 1950s.

That was back in a time when government-owned utilities dominated the marketplace and we had a high tariff wall against global trade.

Our tax system, in large part, has not kept pace with global progress.

It is now out of step with the rest of the world.

On average, of all tax collected across the OECD, around 34 per cent comes from personal and company taxes. In contrast, the Australian Government collects over 70 per cent from those revenue sources - or 60 per cent if you take into account state revenue.

Just 12 companies pay one third of all company tax. That means changes in company structures - or a sudden change in the business environment - can lead to dramatic changes in the revenue we receive from company tax.

On an individual basis, just two per cent of taxpayers pay a quarter of all personal income tax.

This needs to be taken into consideration when discussing the tax system.

And why is this important? Because the taxes we collect and the stability of our revenue base determine the services we can provide.

We need a tax system that is fit for purpose and one that is relevant to our future needs.

What we know is that consumer behaviour and globalisation are changing the nature of our economy.

As a start, new technologies are empowering consumers and breaking down the traditional economic structures.

Disruptive technologies are eroding the powers of government. Never before in our history have our markets been so fragmented.

Governments will never again be as influential in our lives as they once were.

Businesses like AirBNB and Uber started up in spite of government regulations, not because of them.

AirBNB became the world’s largest hotel chain without owning one room or seeking planning approval for one hotel.

Uber became the world’s largest taxi company without owning one single taxi licence.

And ASOS, the UK fashion website, became one of the world’s largest fashion retailers, without a single change room.

Four cargo planes of ASOS packages arrive in Australia each and every week. These clothes are bought sight unseen, and simply returned to an Australian drop off location if an exchange is required. Users can pay a flat yearly fee for unlimited three day express shipping from the UK. For orders less than $1,000, potentially neither ASOS nor the consumers pay the GST.

These are the disruptive forces our tax system must face up to.

Consumer sovereignty is challenging how we govern, how we regulate and how we collect tax.

Budget position

The 2015 Intergenerational Report warns that pressure on taxes and spending will increase over the next four decades.

If left unchecked, the public spending we inherited in government would have grown by an average of 3.6 per cent each year, reaching 37 per cent of GDP in 2055. The budget deficit would then be projected to deteriorate to almost 12 per cent of GDP – around three times the scale of the worst Budget deficit recorded by Labor.

Under the budget settings left by Labor, net debt would be larger than the size of the Australian economy. Net debt would be $5.6 trillion in today’s dollars. On an international level this would put our debt at around Mediterranean levels. This is simply unsustainable.

After the action we have currently taken and legislated, projected net debt is halved over the next forty years, to $2.6 trillion in today’s dollars. Again - even though projected net debt is halved – this still doesn’t go far enough.

In contrast, our policies – if fully implemented – would see Australia return to living within our means and see net debt decline to zero by 2032.

And why does this matter?

It matters because every single dollar of additional debt is money that will be left for future generations to pay off. Leaving the next generation to pick up the tab for the spending of today is simply not fair.

Australia is currently borrowing $100 million each and every day.

Just think about the scale of that.

A hundred million dollars a day could buy you 40 kilometres of new road.

It could buy you two brand new high schools every day.

In a week, you would get a brand new major teaching hospital.

Instead, we are borrowing this money just to pay our day-to-day bills.

This is not something I would be proud to leave to future generations.

To maximise the opportunities of tomorrow, we must live within our means today.

Improving our Budget position would afford scope for future governments to further adjust policy to provide tax relief or make further productivity-enhancing investments. This would, in turn, boost economic growth.

The tax system should serve a dual purpose of collecting revenue and facilitating economic growth.

This is not a simplistic trade-off of tax cuts or tax increases. It requires a carefully structured approach.

As I have said on many occasions, no country has ever taxed its way to prosperity.

But we cannot look at taxation in isolation from our expenditure and our economy.

The next component of our economic strategy will come in May with the 2015 Budget.

The 2015 Budget will be responsible, it will be measured and it will be fair.

The focus will be to build a stronger Australian economy through:

Boosting small business;

Reforming childcare to encourage participation;

Improving productivity by investing in infrastructure;

Expanding export markets through free trade agreements; and

Building greater confidence and integrity in our tax and welfare systems.

We will also continue to improve the budget bottom line each and every year. Australia must continue a sensible path of fiscal consolidation. We must live within our means.

In addition, monetary policy and fiscal policy will work hand in hand.

All new spending will be offset by savings that are responsible and fair.

Importantly, the government will continue to invest in the drivers of economic growth.

The 2015 Budget will create jobs, growth and opportunity so that we can relieve the burden on Australians. It will enable us to unlock the incredible potential of our future.

Good economic management will balance our expenditure and revenue needs to ensure continued strong growth and further improvement to our high standard of living.

Governing may be tough in these times but we can never give up on preparing for the future.

There is no finishing line on reform because the status quo is not an option.

Australia has seen life expectancy rise, our incomes rise and our quality of life increase substantially over the past four decades.

It is what we have come to expect will happen.

And so, more than ever, if we want to stay the same, we need to change.